We tried rent controls before and they didn't work

Take one hundred economists. Punch each of them. Now that you’re feeling better, stick your hand in some ice and ask them each a question: do they think rent controls, or price ceilings of any kind, are a good idea? They will already be a bit annoyed at you, but suggesting rent control will probably offend them more than a knuckle sandwich.

You’d be more likely to successfully herd cats into a bath than get economists to agree on something, but when it comes to rent controls, the evidence is in: they just. don’t. work. We’re talking more than a thousand papers written on the subject.

The idea then, as it is today in Ireland, was to “ensure affordable housing and to prevent profiteering”. The experience is clear: from the ‘first’ generation of rent controls, which were just price ceilings, imposed in response to wartime difficulties, to the ‘second, softer’ generation of controls imposed when double-digit inflation rates caused rental levels to increase abruptly, to the new third generation of controls which are effectively just better specified longer lease contracts. Across many countries and with decades of experience we now know what will happen if rent certainty is imposed in Ireland.

Surveys of the experience of rent control in the academic literature shows rent control lowers the supply of available housing. Rent control severely reduces mobility of tenancy. When you impose rent controls, effectively you privilege one set of people—those who get the rent control—over everyone else, those who want to rent the home later, and those who might want to improve their rental properties.

I’m writing this column in Paris, where more than half of all accommdation is rented. The government will enact the Loi Duflot, named after the Minister who pushed the reforms through, in 2016 to reduce agency fees, cap rental rates and reduce bureaucracy. No new rental agreement will be permitted to charge more than 20% per square meter above the neighbourhood’s median rent. In exchange for not going mad and lobbying the government to stop this happening, landlords are being bought off with a tax break on their rental income if their area is designated short of supply. The big worry in Paris is that landlords here will simply sell before the law comes into force and cripple the rental system.

It may surprise readers to know we had a form of rent control in Ireland from the 1940s to the 1980s. Writing in 1982, Threshold’s Lancelot O’Brien and Brian Dillion described how as local authority housing was rolled out, by the mid 1940s the public provision of rental housing eclipsed the private sector, which was in decline due to lack of investment caused in part by—you guessed it—rent controls.

These rent controls were only a temporary measure when they were introduced in the post war period, to curb rental price increases during a time of housing shortage (does any of this sound familiar?), but the moment they were, it became very difficult to remove them. So it will be with the current policy initiative. The Universal Social Charge was a temporary tax too. So was the first ever income tax, introduced in the early 20th Century. I’m not against government intervention when it is warranted, but the research could not be clearer. Rent certainty and rent controls are bad news, even if we’re really just talking about rent increases being regulated, but with a decidedly light touch, with rises capped to a certain percentage over three years or so.

It’s still all about housing when it comes to Ireland’s economy. Supply is the problem when it comes to housing, not high prices. The lack of available housing supply is driving up prices, and nothing more. According to daft.ie, the stock of available rental properties across the country last month fell to the lowest point since at least early 2006. Rents have gone up 8.2% over the past year and are near boom-levels, while household incomes have fallen considerably. Prices in the commuter counties around Dublin, for example, rose 13.9%.

As O’Brien and Dillon showed in the 1980s, the seductive allure of intervening in the market has always occupied Ireland’s policy makers. From building and zoning regulations to rental and mortgage allowances for landlords, tenants, social housing and other supports, the housing market is one of the most distorted in Ireland. The argument might be that one more set of regulations might not kill it, but given the large expansion of rented accommodation in Ireland—it more than doubled over the crisis years—and the new populations being served by rental accommodation, it is certainly time to look again at the balance of power between landlord and tenant. The last serious review of rental policies was in the early 2000s. The current set up is badly designed, poorly privatised, and is leading to unnecessary hardship.

The motivation for introducing rent certainty is clear. People are being thrown out of their homes. The route to stopping this is not controlling prices, it is raising rent supplement to match market rates, building more social housing and improving the provisions around the security of tenure. Introducing a rental increase tied to inflation sounds good, in theory, especially as inflation rates are now so low. But inflation rates aren’t always low.

Ireland needs to transition away from a model where everyone needs to own a home. In order to do that, privately rented tenancies need much stronger support and regulation. Landlords and tenants generally just want to get along, even though they represent opposite sides of the market. There is no quick fix in the market for rental accommodation and Minister Kelly needs to stay well away from calls to introduce rent controls. Our own history, not to mention a gaggle of punch-drunk economists and a thousand published articles, tells us they won’t work.

Sunday Business Post, 8 June 2015.